Apple and Qualcomm settle: Here’s what the battle means for your next iPhone – CNET

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The frenemies have made up.

Apple and Qualcomm settled a two-year-old battle over patent licensing on Tuesday, a reconciliation that ended a trial that had started just a day earlier. The companies, which had been fighting in courts in China, Germany and other countries, in addition to the US, will end all worldwide litigation.

Cupertino, California-based Apple will make an unspecified payment to Qualcomm, according to a joint statement. The companies have also reached a six-year licensing agreement that includes a two-year option to extend and a multiyear chipset supply agreement. The agreement went into effect on April 1, the companies said.

The companies didn't say what prompted the change of heart. As recently as January, Apple CEO Tim Cook said the iPhone maker wasn't in talks with Qualcomm. Analysts speculated that Apple's need for 5G chips might have spurred the iPhone maker to negotiate, a view backed up by a Nikkei report that said the company had tested Qualcomm 5G chips as the companies explored a settlement.

Neither Apple not Qualcomm commented beyond their statement.

The decision set the San Diego courtroom the companies were appearing in abuzz. Apple and its contract manufacturers had presented their opening arguments and a lawyer for Qualcomm had nearly finished when the announcement was made. A day earlier, the sides had selected a jury that included a pilot, a retired nurse and a former pitcher for the Kansas City Royals.

The settlement is the latest twist in a fight that could put your iPhone at risk. San Diego-based Qualcomm supplies network connectivity chips for Apple's iPhones and is the world's biggest provider of mobile chips. Its technology is essential for connecting phones to cellular networks. The company derives a significant portion of its revenue from licensing its inventions to hundreds of device makers, with the fee based on the value of the phone, not the components. Qualcomm owns patents related to 3G, 4G and 5G phones — as well as other features like software — so any handset makers building a device that connects to the networks has to pay it a licensing fee, even if they don't use Qualcomm's chips.

Qualcomm and Apple are fighting over patents and licensing fees.

That includes Apple. The company makes its own applications processor — the brains of the iPhone — but it relies on third-party chips for network connectivity. From the iPhone 4S in 2011 to the iPhone 6S and 6S Plus in 2015, the sole supplier for those chips was Qualcomm. The following year, Apple started using Intel modems in some models of the iPhone 7 and 7 Plus, but it still used Qualcomm in versions for Verizon and Sprint.

It continued that trend in 2017, but Apple's latest phones — the iPhone XS, XS Max and XR, now only use Intel 4G chips. Apple blamed Qualcomm, though Qualcomm said it would like to supply to Apple. Still, Apple's move to 5G could be held up by not working with Qualcomm.

Apple thinks it should pay a royalty fee based only on the value of Qualcomm's connectivity chips, not the entire device. It says Qualcomm is "effectively taxing Apple's innovation" and that Apple "shouldn't have to pay them for technology breakthroughs they have nothing to do with." Its manufacturing partners, like Foxconn, agree.

Qualcomm says its technology is much more than just connectivity. It's also multimedia, imaging, GPS and countless other inventions that make a phone a phone. Qualcomm even filed for a patent in 2000, seven years before Apple introduced the iPhone, that is one of the first smartphone descriptions and that describes how to conserve power in a smartphone. Without its technology, Qualcomm says, the iPhone wouldn't be possible.

Two years ago, the US Federal Trade Commission sided with Apple and filed an antitrust lawsuit against Qualcomm. It accused the company of operating a monopoly in wireless chips, forcing customers like Apple to work with it exclusively and charging excessive licensing fees for its technology. The two met in a San Jose, California, court in January to argue their case before a judge, and Apple provided some of the FTC's key witnesses and evidence. Qualcomm is awaiting a verdict in that case. It's unclear at this point if the settlement could affect the San Jose decision.

Apple and Qualcomm then faced off directly in March for a patent infringement trial. A jury handed Qualcomm a victory and ordered Apple to pay it $31 million for violating three Qualcomm patents.

Here's what you need to know about this fight:

What's Qualcomm again?

You may not know the Qualcomm name (unless you live in its hometown of San Diego and frequent Qualcomm Stadium), but the odds are pretty high you've used a device with its technology. Qualcomm is best known for its chips that connect phones to cellular networks, as well as its Snapdragon processors that act as the brains of mobile devices.

We shouldn't have to pay them for technology breakthroughs they have nothing to do with.

Apple

Qualcomm is one of the key component suppliers to Samsung and other phone makers (including Apple, until 2018). Without a modem in your device, you wouldn't be able to hail a Lyft to take you home or check Facebook while you're waiting in line at a food truck.

What technology does Qualcomm make?

Along with its processors, Qualcomm invents a lot of technology that's used in mobile devices. The company says it's invested more than $40 billion in research and development over the past three decades, and its patent portfolio contains more than 130,000 issued patents and patent applications worldwide.

The technology is centered on cellular communications and includes both standard essential patents and nonessential patents. (Standard essential patents are technologies that are vital to a device. They have to be licensed at fair and reasonable terms. Nonessential patents don't have those requirements.)

Some Qualcomm patents relate to multimedia standards, mobile operating systems, user interfaces, displays, power management, Wi-Fi, Bluetooth and even airplane mode. The company is also the pioneer of CDMA, the 3G mobile network standard used by Verizon and Sprint, and it's innovated in 4G and 5G network connectivity.

"Qualcomm's inventions are necessary for the entire cellular network to function — they are not limited to technologies in modem chipsets or even cell phones," Qualcomm said in a filing.

Now playing: Watch this: Apple, Qualcomm go head-to-head — with billions at stake

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What prompted the fight between Apple and Qualcomm?

It all came down to money. Apple said Qualcomm charges too much in licensing fees for its mobile technology. Qualcomm said the iPhone (and other mobile devices) wouldn't be possible without its technology. Qualcomm also accused Apple of infringing its patents for technology like power management.

What did Apple say in its complaints?

In part: "For many years, Qualcomm has unfairly insisted on charging royalties for technologies they have nothing to do with. The more Apple innovates with unique features such as TouchID, advanced displays, and cameras, to name just a few, the more money Qualcomm collects for no reason and the more expensive it becomes for Apple to fund these innovations."

What did Qualcomm say?

In part: "Apple's goal is clear — to leverage its immense power to force Qualcomm into accepting less than fair value for the patented technologies that have led innovation in cellular technology and helped Apple generate more than $760 billion in iPhone sales."

How did the legal battle start?

There's been a lot of legal back and forth, but here are the basics. Apple initially filed suit against Qualcomm in January 2017 in the US, saying the company didn't offer fair licensing terms for its mobile technology. Qualcomm fired back in April of that year, denying all Apple's allegations and accusing Apple of breach of contract and of interfering with agreements and relationships Qualcomm has with contract manufacturers.

Apple continues to use our technology and not pay for it. They've really left us no choice but to say, 'You've got to stop this.'

Don Rosenberg, Qualcomm's general counsel

Apple, through its manufacturers, stopped paying Qualcomm's licensing fees for iPhones sold in the March quarter of 2017. That caused Qualcomm to pursue legal action to get paid.

What's up with the ITC?

Qualcomm also filed a complaint with the US International Trade Commission in July 2017, asking that some iPhones that used Intel chips be banned from import and sale in the US because Apple allegedly infringed six of Qualcomm's patents. It also filed suit against Apple in the Southern District of California.

Technology companies in recent years have increasingly turned to the ITC to settle their disputes. Companies can pursue an ITC case in parallel with civil lawsuits.

"Apple continues to use our technology and not pay for it," Don Rosenberg, Qualcomm's general counsel, said in an interview after filing its lawsuits. "They've really left us no choice but to say, 'You've got to stop this.'"

In January 2018, the US Patent and Trademark Office's Patent Trial and Appeal Board said it would review three Qualcomm patents at issue in its ITC cases against Apple. Such a review can result in the patents being invalidated. One of the patents, No. 9,535,490, is the key patent asserted by Qualcomm in its lawsuit suit against Apple. It covers "power saving techniques in computing devices" that help reduce the electricity consumption by phones.

About 64 percent of the time following an IPR review, all patent claims are invalidated, according to a trial statistics report by the USPTO. And 17 percent of the time, some claims are invalidated.

In March 2018, the ITC handed down two separate decisions. One found in favor of Qualcomm while the other sided with Apple.

In one case, a judge said Apple's iPhones have infringed a Qualcomm patent and should be banned from sale. But a full commission review in a second, separate case said Apple didn't infringe Qualcomm patents and dismissed that suit. It also said it found that Qualcomm's patents aren't valid.

Meeting in court

What happened in the March trial?

The first trial between Apple and Qualcomm was all about patents. Qualcomm in July 2017 accused Apple of infringing six non-standard-essential patents, but only three ended up making it to court. One patent allows a smartphone to quickly connect to the internet once the device is turned on. Another deals with graphics processing and battery life. The third lets apps on your phone download data more easily by directing traffic between the apps processor and the modem.

A jury ultimately decided that Apple violated all three of Qualcomm's patents and said it should pay the chipmaker $31 million — or $1.41 per iPhone — for infringing on its technology. The jury awarded Qualcomm the full amount it had requested at the start of the two-week trial, which took place in San Diego.

What about the April trial?

The April trial that was just settled was supposed to be the big one. It relates to Apple's initial complaint, in which it sued Qualcomm for allegedly unfair licensing terms. Apple also said Qualcomm sought to punish it for cooperating in a South Korean investigation into Qualcomm's licensing practices by withholding a $1 billion rebate.

Apple wants a court to lower the amount it pays Qualcomm in licensing fees, as well as order the return of the $1 billion.

Qualcomm maintains that no modern handset — including the iPhone — would have been possible "without relying upon Qualcomm's fundamental cellular technologies." In its response to Apple's filing, the company made its own counterclaims, including breach of contract and unfair competition. It also asked for an unspecified amount in damages and said Apple had interfered with its relationship with contract manufacturers.

In May 2017, Qualcomm filed a lawsuit against Apple's iPhone manufacturers that alleged breach of contract. The suit came less than a month after Apple stopped paying patent royalties for Qualcomm technology that's essential for connecting phones to a wireless network.

In July 2017, those four iPhone makers joined Apple by filing a suit against Qualcomm, alleging it used its market position to charge excessive royalties. The four companies are Foxconn parent Hon Hai Precision Industry, Wistron, Compal Electronics and Pegatron. They're seeking at least $9 billion in damages, which could be tripled to $27 billion under antitrust law.

Patents and more patents

How does Qualcomm's licensing business work?

Some companies license patents on an individual basis; Qualcomm licenses all its patents as a group. For a set fee — based on the selling price of the end device, typically a phone — the device maker gets to use all of Qualcomm's technology.

It's been the norm in the mobile industry for patent holders to base their licensing fees on the total value of a handset, so Qualcomm isn't alone there. Ericsson, Huawei, Nokia, Samsung and ZTE also charge licensing fees based on the total device. Any company that makes a device that connects to a mobile network has to pay Qualcomm a licensing fee, even if it doesn't use Qualcomm chips.

Part of the dispute between Apple and Qualcomm is that Apple believes its licensing fee should be based on the Qualcomm chip used in the device, not the entire phone.

"They do some really great work around standards-essential patents, but it's one small part of what an iPhone is," Apple CEO Tim Cook said in May 2017. "It has nothing do with the display or the Touch ID or a gazillion other innovations that Apple has done. And so we don't think that's right, and so we're taking a principled stand on it."

Who licenses Qualcomm's technology?

Qualcomm licenses its technology to more than 340 companies, particularly phone vendors. It doesn't license its patents to chipmakers, though, which is something governments and Apple have taken issue with. Qualcomm argues that chipmakers don't need licenses because the handset makers already cover the cost of using its technology.

Apple licenses Qualcomm's technology through its manufacturers, like Foxconn, instead of having a license of its own. Apple said during the January trial that it's been trying for five years to negotiate a direct license with Qualcomm but that the terms offered — like cross-licensing Apple's technology — weren't fair. Apple's manufacturing partners are also involved in the legal disputes.

In April 2017, Apple said it stopped paying Qualcomm royalties for devices sold during the March quarter. Qualcomm accused the manufacturers of breach of contract. Qualcomm in October said that Apple owes it $7 billion in patent licensing fees.

So what's Qualcomm's licensing fee?

Qualcomm's licensing fees are based on the total value of a device ($999 in the case of the iPhone XS) versus the value of a chip (closer to $20), but they're also capped at a certain level. The FTC-Qualcomm battle revealed specific details about Qualcomm's licensing fees, including the rate Apple paid.

Apple partners paid Qualcomm a licensing fee five times higher than it thought was fair, Apple COO Jeff Williams testified during the FTC trial. Apple wanted to pay $1.50 per device in royalties to Qualcomm, based on a 5 percent fee for the cost of each $30 modem connecting iPhones to mobile networks. Instead, it ended up paying $7.50 per phone, he said.

"The whole idea of a percentage of the cost of the phone didn't make sense to us," Williams said. "It struck at our very core of fairness. At the time we were making something really, really different."

Still, Apple agreed to the rate since it was lower than what Qualcomm wanted to charge the contract manufacturers — a 5 percent fee for every iPhone sold, which would equate to about $12 to $20 per device, Williams said. A rebate agreement dropped that to $7.50 per iPhone, and the level stayed steady over the years.

In November 2017, Chinese handset makers started paying Qualcomm royalties for its 3G and 4G patents at 3.25 percent of the selling price of every phone sold in that country. Qualcomm later rolled that rate out across its licensing base. It also capped the value of handsets, which its royalty is based on, at $400, even if a device sold for triple that. And Qualcomm's cap for a full portfolio license is $20 per device and $13 for only Qualcomm's essential patents.

By comparison, in one of its patent battles with Samsung, Apple argued it deserved $40 per device for Samsung's infringement of five patents, as well as lost profits, for a total of $2.19 billion. A jury ultimately ordered Samsung to pay $119.6 million for infringing three of Apple's five patents that related to software features like "quick links" and "slide to unlock." And in the March patent trial between Apple and Qualcomm, a jury decided that three non-essential patents from Qualcomm were worth $1.41 per iPhone.

Does Intel factor into this?

When Apple first launched the iPhone a decade ago, it used modems from Germany's Infineon. That went on for the next three years until Apple switched to Qualcomm in 2011.

Intel bought Infineon in 2011, but its chips didn't appear in the iPhone again until 2016's iPhone 7 and 7 Plus. At that time, US models running on networks from AT&T and T-Mobile started using Intel processors, while Verizon and Sprint versions used Qualcomm. Intel is now the sole supplier of iPhone modems.

Qualcomm has accused Apple of giving trade secrets to Intel. In September, it said in a lawsuit that Apple gave Intel engineers confidential information, including Qualcomm source code and log files, to overcome flaws in their company's chips used in iPhones. Qualcomm said in a complaint that Apple uses this "second source of chipsets" to pressure it in business negotiations.

The new complaint from Qualcomm is an amendment to the November 2017 suit filed against Apple. Qualcomm said newly uncovered facts have given rise to additional charges against the iPhone maker, including trade secret appropriation and breach of agreement.

Other legal battles

What's going on between Apple and Qualcomm outside the US?

Apple has filed lawsuits against Qualcomm in China and the UK, while Qualcomm has responded with countersuits in China and Germany.

In early December 2018, a Chinese court ordered four of Apple's Chinese subsidiaries to stop importing or selling iPhones because of patent infringement. The patents involve technology that lets iPhone users adjust and reformat the size and appearance of photographs, and manage applications using a touchscreen when viewing, navigating and dismissing applications.

Later that same month, a court in Munich found that Apple infringed Qualcomm's technology for power savings in smartphones and ruled that the iPhone maker must halt sales of the device in Germany. Apple in February resumed selling its iPhone 7 and iPhone 8 in Germany again, but it only offered models with Qualcomm chips. Apple stopped using chips from Intel in the older devices in order to comply with the German court decision.

In January, a different German court, in Mannheim, dismissed Qualcomm's latest claims against Apple, calling them unfounded. The second German case is related to something called "bulk tension," or voltage, in iPhones. The ruling from a regional court said Apple didn't infringe Qualcomm's patents because voltage in smartphones isn't constant. It dismissed the claim, but Qualcomm is appealing.

What other legal issues are facing Qualcomm?

Qualcomm has come under a lot of regulatory scrutiny in recent years for alleged monopolistic practices.

In China in early 2015, Qualcomm agreed to pay a $975 million fine and lower its licensing fees to settle the dispute in that country. South Korea slapped the company with a $850 million fine the following year, which Qualcomm is appealing. The EU in early 2018 fined Qualcomm $1.23 billion for paying Apple to use only its chips, something Qualcomm also is appealing. And in August of that year, the company reached a settlement with Taiwan, where the country would keep the $93 million Qualcomm had paid, but the company wouldn't owe anything more.

Meanwhile, in March 2019, the Japan Fair Trade Commission decided that Qualcomm wasn't a monopoly after all, reversing its decision from about a decade ago.

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